State, business officials contemplate next generation of economic incentives

The Administration Building on Holtec International's Krishna P. Singh Technology Campus in Camden. Holtec was awarded $260 million in state tax credits to relocate its headquarters to Camden. - (AARON HOUSTON)

Three days after taking office, Gov. Phil Murphy used an appearance at Tigerlabs, an incubator for tech startups in Princeton, to assert his intention to take a close-up look at how the state awards billions of dollars in tax credits aimed at attracting businesses to New Jersey or keeping them from going elsewhere.

“Tax incentives play a role in smart economic development,” Murphy said as he signed his third executive order, this one directing the state comptroller to audit the records for $8 billion in tax incentives doled out by the Economic Development Authority dating back to 2010 when Chris Christie became governor.

“At the same time we were handing out these billions in tax breaks, our economy continued to lag behind nearly everyone else in the nation,” Murphy continued. “The people of New Jersey deserve to know what, exactly, they got for their $8 billion.”

Murphy cited data from a 2017 report by the nonpartisan, noncommissioned global consulting firm The McKinsey Group, which criticized how the state provided tax credits and suggested it should focus more on startup companies and infrastructure upgrades.

“The state of New Jersey puts a great deal of effort into economic development programs to attract new businesses and help existing businesses thrive,” the report read. “However, these programs are typically less productive than they have been in many peer states. … New Jersey gets less return on the incentives it provides to attract and retain companies.”

Nevertheless, many continue to praise the programs, the largest of which are governed by the NJEDA and administered by the treasury, as vital tools for helping to offset the costs of doing business in New Jersey.

And while state officials anticipate the results of the audit, they also await a decision by Amazon on where its second North American headquarters will be – and whether the state’s $5 billion incentives package (and Newark’s $2 billion) will be enticing enough for the e-commerce giant to call Newark its East Coast home.

Growing New Jersey

Under Christie, the state enacted the New Jersey Economic Opportunity Act of 2013, which vastly expanded the programs in an effort to help it bounce back from the Great Recession.

The bill created the Grow NJ program as a means to incentivize the creation and retention of jobs in New Jersey and the Economic Redevelopment and Growth program to provide financing for commercial and residential developments, particularly in economically downtrodden areas, that wouldn’t otherwise have seen the light.

New Jersey certifies that companies deliver a certain number of jobs and economic investment before it gives them an annual amount of credits, generally over the course of 10 to 20 years.

Of the $8 billion in incentives given during Christie’s eight years in office, the EDA dispensed $4.4 billion between December 2013 and August 2017 under the Grow NJ program, spanning 227 awards for 224 companies to create or retain 59,000 jobs over a 10-year period, according to a report issued in July by the Edward J. Bloustein School of Planning and Public Policy at Rutgers University-New Brunswick and presented to Murphy by the EDA.

Under the ERG program, the EDA gave out another $1 billion in tax credits during the same time period.

“In a general sense, given New Jersey’s high cost, whether it’s taxes, whether it’s the like, we’re not competitive with many parts of the country,” said James Hughes, a professor and Dean Emeritus of the Bloustein School.

“Compared to let’s say, Pennsylvania, we’re much more expensive, and then super expensive relative to say, Georgia and North Carolina,” Hughes said. “So we’re at a super disadvantage, and the only possible way for companies that are footloose and have the ability to move, incentives are going to be important for those situations.”

Hughes cited as one example the 2015 decision by Mercedes-Benz to move its corporate U.S. headquarters out of the New Jersey borough of Montvale and down to Atlanta.

Hudson County, particularly Jersey City, received the bulk of the Christie tax credits, but the largest single awards went to companies to move to Camden, deemed by the EDA as among New Jersey’s distressed municipalities.

“We’re realizing $2.5 billion in new investment since the tax credits have gone into effect; 30 new businesses; [and] $15 billion that has been spent locally in Camden-based businesses,” Basara said. “Unemployment’s down. It’s gone from 19 percent in 2010 to 10 percent in 2018.”

“We’ve received the lion’s share [of credits],” he continued, “but Camden hasn’t always been on a level playing field.”

Attraction vs. retention

There are those such as Melissa Orsen, CEO of the EDA from 2015 to 2017, who have their doubts whether tax credits make or break a company’s decision to stay in New Jersey.

“You’d have a business come in and say ‘I’m going to move to Pennsylvania, I’m going to move to New York, if you don’t give me a tax credit,’ but these companies are incredibly vested in our community. That’s a very hard thing to do,” Orsen said.

Instead, she suggested, the credits need to focus on attracting new businesses into the state and helping small businesses grow.

But while credits can in some instances be a primary driver for getting a company to relocate here, there are those who believe they are overrated.

“The businesses that decide to grow in the state or move to another state, the state and local taxes consideration makes up less than 5 percent of doing business,” said Sheila Reynertson, a policy analyst with New Jersey Policy Perspective. “So that consideration ends up being much less than when looking at the factors like proximity to markets, the well-educated workforce, well-functioning public safety, good access to mass transit and a good transit/transportation network.”

Meanwhile, the July report from Rutgers’ Bloustein School indicated the state may be giving away too much through the EDA’s tax credit programs.

“Redundancies in the Grow NJ base and bonus award structure are potentially providing more generous incentives than intended by the statute,” the report said, adding it was too soon to fully evaluate the impact of those programs on the state’s economy.

Tom Bracken, president and CEO of the New Jersey Chamber of Commerce, suggested the program be reworked to allow smaller and medium-sized companies better access to credits.

“We need to grow the economy,” Bracken said. “The best way to grow the economy is to have the companies that are already here be incentivized to grow. There’s a much heavier cost to luring companies that are out of state versus companies that are here.”

And as for the state’s plan to put forward at least $5 billion to attract Amazon, Bracken said he has his concerns.

“It’s a lot of eggs in one basket,” he said. “I don’t think anybody would be disappointed if Amazon came, but we would be paying a heavy price.”

Instead, Bracken said, the state might do better divvying up the $5 billion in tax credits to the state’s existing businesses to help them expand their economic footprint.

Long-term outlook

Grow NJ sunsets on July 1, 2019, the beginning of the state’s 2020 fiscal year.

To that end, the EDA approved a $1.9 million, two-year contract with The McKinsey Group to lay out a long-term economic strategic plan.

McKinsey is being asked to “assist in developing a statewide economic plan ward and restore its place as a global economic leader,” according to a memo from EDA CEO Tim Sullivan to the authority’s board members.

In the first phase, slated to span three months, McKinsey will map out a statewide economic development plan and assess the state’s different incentives.

Then, in the second phase that is expected to last another three months, McKinsey will analyze how the state could attract overseas investment and businesses and use “clean energy financing tools” to support Murphy’s environmental goals.

“The governor’s talking a lot about the need to take a fresh look at incentives and make sure we’re getting the right value for investment, make sure we’re getting the right return on our investments and make sure we’re encouraging the parts of the economy that we think need the most encouragement.” Sullivan told NJBIZ in July.